The Valpak Brief

James Cox Kennedy is the chairman of Cox Enterprises, a media conglomerate founded by his grandfather. Mr. Kennedy is part of the 1% the Occupy movement is protesting against. Actually, according to the Forbes 400 list, Mr. Kennedy’s $6 billion stake in the family’s company makes him the 53rd richest person in the United States, and that puts him in the top 0.00002%. Mr. Kennedy doesn’t own the country’s post offices, but his company has hired a law firm to advocate closing them.

Cox Enterprises is a highly diversified company based in Sandy Springs, Georgia. It owns 15 television stations, 86 radio stations, several newspapers, and a broadband communications and entertainment company. It also owns Cox Target Media, North America’s direct mail leader and provider of the Valpak® savings envelope.

You’re probably familiar with Valpak’s “Blue Envelopes®.” They show up in your mailbox now and then, filled with coupons for discounts on a variety of products and services — automotive, beauty, entertainment, health, home improvement. Maybe you look forward to saving a few bucks next time you need an oil change or a pizza. Maybe you toss the thing in the trash without a second thought.

Valpak depends on the Postal Service to deliver those Blue Envelopes, but the company isn’t very interested in post offices and postal workers. Its primary concern is keeping postal rates down and profits up. Cox mails the Blue Envelope to 40 million households each month, 500 million a year. With that kind of volume, even the smallest increase in rates quickly adds up and cuts into profits. That’s why the big mail industry stakeholders like Valpak and the Direct Marketing Association favor cuts to the postal workforce, processing plants, and retail network.

On Friday, Valpak submitted its “Initial Brief” to the Postal Regulatory Commission (PRC) on the case of the Retail Access Optimization Initiative (RAOI), the Postal Service’s plan to close 3,650 post offices. The brief was prepared by William J. Olson, PC, a Virginia law firm that deals with various kinds of law — constitutional, nonprofit organization, election, health, and firearms — as well as postal law. Olson himself has written several papers about the postal system, such as “Enhancing Competition By Unbundling the Postal Administration,” which is about “bifurcating” the postal system so that a government-owned agency would take care of delivering the mail (thereby maintaining the universal service obligation), while the receiving and processing component of the system would be privatized.

The Valpak brief argues that the PRC should approve the RAOI because it will help “the Postal Service’s near-desperate need to achieve increased efficiencies and cost savings” and thereby avoid “some form of bailout from Congress, possibly from taxpayers, in order to continue operating.” The brief addresses legal principles, the financial setting, the Village Post Office, the “non-postal” benefits of a post office, and so on, but the heart of the matter for Valpak is that post offices are simply a very "inefficient" way to “collect revenue” so it only makes sense to close post offices that are losing money and “unnecessary.” Otherwise, we’re headed for a “bailout.”

In its own “Initial Brief” to the PRC, the Postal Service studiously avoids any suggestion that post offices might be closed for running at a deficit. “The RAO Initiative is structured so as not to violate the 39 U.S.C. § 101(b) prohibition against closing small Post Offices solely for operating at a deficit,” says the USPS brief. James Boldt, the man running the RAOI, explicitly testified that whether any facilities were "operating at a deficit" was “not a criterion for their inclusion as candidates for discontinuance review under the RAO Initiative.” The Postal Service has said repeatedly the RAOI is not only about “cost savings” but also about “optimizing the retail network” and other goals. The Final Determination notices to close post offices always make it clear that there were several reasons for the discontinuance, not just that the post office was running at a deficit.

The Valpak brief, however, does not mince words, and it probably has the USPS lawyers cringing. Valpak goes straight for the deficit issue and lays bare the real reason — the only reason — for closing post offices. The brief states, “Uneconomic retail services, including but not limited to those post offices with a two-hour earned workload, constitute what long has been the most expensive and inefficient way of providing citizens with access to retail postal services.”

Valpak provides a detailed analysis of these inefficiencies by showing that the average operating deficit for most of the post offices on the RAOI is $55,426 a year, and it breaks that down for the population of small towns to show that the “operating per-capita deficit averaged between $92 and $139.” The brief also shows that for these small town post offices, for each dollar of revenue collected, the Postal Service need to spend, on average, $3.58.

Valpak finds this situation unsustainable. It means that somebody else is going “to subsidize costly, uneconomic post offices” — Congress, state governments, residents of the local community, or ratepayers. Since it’s unlikely that any of the first three will pick up the tab, ratepayers like Valpak will be stuck with the bill.

Not that Valpak sees this as an option. “Ratepayers certainly cannot be forced to provide more revenue,” states the brief, “as they are protected not only by PAEA’s statutory rate cap, but also, and more importantly, by what is becoming nearly universal access to the Internet.” That’s a strange comment and worth thinking about.

As Valpak knows well, the PAEA imposes a rate cap but it also provides for an exigent rate increase beyond the cap — something Valpak has fought — so there’s no real “protection” there. And it’s hard to see how the Internet “protects” ratepayers. Perhaps Valpak means that the Internet provides an alternative, so if rates do go up, it can do its marketing on the web instead of through the mail. If that’s the implication, Valpak is basically threatening the PRC: let the Postal Service close post offices or we go to the Internet. That argument may carry some weight at L’Enfant Plaza, but it’s not likely to wash with the American people, and it shouldn't impress the PRC either.

The Valpak brief is also much more explicit than the Postal Service has been about the ultimate goal of the RAOI and the Postal Service’s long-range plans. As parties on both sides of the debate acknowledge, closing a few thousand small post offices isn’t going to save much money, $200 million a year at the most — a drop in the deficit bucket for the Postal Service. But Valpak knows that the RAOI is just the beginning. The plan is to close most of the country’s brick-and-mortar post offices, and that could save some serious money.

According to the way the Postal Service figures costs and revenues, 80 or 90 percent run in the red. The Valpak brief points to “the relatively high cost and inefficiency of selling postage and collecting revenue via the retail postal network,” and it says that “other marketing channels used by the Postal Service,” like stamps by mail and contract postal units (CPUs), make much more financial sense. Not only do these alternatives save money, they are more consistent with Title 39 and PAEA, says Valpak, because these statutes obligate the Postal Service to maintain "reasonable economies" and "financial stability." Even if the RAOI isn’t going to save a lot of money, says the brief, “the principles the Commission adopts in this docket could influence other closings which may come later. The financial imperative which drives the Postal Service at this critical time cannot be ignored because the dollar amounts are modest.”

In other words, the RAOI should be approved so that many more post offices can be closed in the future — 4,000 more on the next list, 16,000 over the next few years, perhaps 90% of them in the end. The Valpak vision of the postal system is about replacing post offices with retail in other venues (online or private businesses), which will make things a lot cheaper for the Postal Service. Valpak just needs a few BMEUs (“bulk mail entry units”) where it can drop off the Blue Envelopes, and a delivery system to get them to your house. Valpak doesn’t need post offices, and it doesn’t want to “subsidize” them in the rates it pays.

The Valpak brief also devotes some space to the idea of establishing contract postal units and Village Post Offices as a way to provide retail serves where a post office may close: “On its face, in rural areas this would appear to be a reasonable, perhaps the best available, solution for fulfilling the universal service obligation to provide citizens with ready access to the postal network.”

The brief was due on Friday, so apparently there wasn’t enough time for a quick revision that might have taken into consideration the fact that the Postmaster General announced earlier in the week that he was pretty much giving up on the VPO idea. In many of the small towns where the post office may close, there’s just no place to put a VPO. It might have been a good idea “on its face,” but when faced with the realities of rural American, it’s just not the great “concept” it was all cracked up to be.

That shouldn’t have been hard to predict. The Postal Service doesn’t have a great track record with contract units. The number of CPUs declined from 7,241 in 1979 to 3,982 in 2008, down 45%. Over the past three months, the Postal Service has set up six or seven VPOs. The concept of replacing a couple of thousand post offices with VPOs was just a pipe dream. The VPO was basically DOA.

Valpak’s grasp of rural life doesn’t seem much better than the PMG’s. You can see it in the tone the brief takes when it turns to discussing the value of a post office to a small town. The brief states that “small retail facilities confer few non-postal-related benefits, which are irrelevant to the Commission’s inquiry.” The brief refers to “the theoretical non-postal ‘benefits’ from small post offices” such as “exchanging weather reports, transmission of local news, planning of non-postal events such as charity balls, etc.,” and says it “is unclear why such ‘informal’ events could not take place elsewhere.”

Aside from the fact that in many towns there aren’t other places like the post office, Valpak clearly finds such talk about the weather and local news unimportant and hardly worthy of consideration in a matter as important as closing post offices to protect its profits. That a post office might provide a community with a sense of place, that the identity of a town might be tied to the post office, that small talk among neighbors is what knits a place together, that the post office might provide many social and economic benefits that are hard to quantify — to Valpak, all this is strictly “theoretical” and certainly “irrelevant” to the PRC’s inquiry.

At the core of the Valpak brief is an argument that the Postal Service must operate as efficiently as possible so that rates are kept as low as possible. Post offices that don’t bring in enough money are inefficient, and they have to go. The social value of a post office does not fall within its definition of “efficiency,” and Valpak doesn’t buy the argument that it’s inefficient to make people travel further to a more distant post office since they can always go online to buy stamps.

But do you really want to hear about “efficiencies” from Valpak? What is “efficient” about using precious natural resources and toxic chemicals to produce 500 million envelopes and billions of coupons, and putting these envelopes in the mail, where they will require fuel and manpower to bring them to your door, so that you can take one look and go, Ugh, and throw the envelope in the trash, requiring even more manpower and fuel and chemicals to recycle them (or put them in landfill)? If that’s “efficient” because some percentage of consumers will use those coupons and justify the profits Valpak makes off the envelopes, our civilization is in deep trouble.

Valpak is on a workgroup for something called the USPS Mailers’ Technical Advisory Committee (MTAC). This committee offers regular opportunities for executives at L’Enfant Plaza “to receive advice and recommendations from mailers.” Such meetings are a way for USPS executives to hear from the mail industry’s big stakeholders, and you can be sure Valpak has made its position clear.

Too bad that the Postal Service doesn’t display the same concern for the interests of the average patron of the post office. In his testimony before the PRC last week, James Boldt, the man in charge of the RAOI, admitted that of the 2,800 community meetings held so far to hear from citizens faced with losing their post office, he had not attended a single one.